Inside Financial Services

Some End-of-Week Thoughts

The Washington Post reports that the federal government is having success in persuading banks and credit unions to provide banking services to marijuana retailers in states where selling marijuana is legal. This federal effort is happening despite the fact that, state laws notwithstanding, possession and sale of marijuana continues to be illegal at the federal level. Thus the government is pressing banks to provide services to businesses that are clearly violating the law, while at the same time pressing banks to not provide services to customers engaged in other business that are obviously legal. I will leave it to you to ponder the irony.

The $17 billion Bank of America is said to be ready to pay to settle with the Justice Department still isn’t enough for some consumer activist types. “These settlements are a public relations scheme to try to convince the American people that they’re on their side when the facts show they have been there for the banks,” Bruce Marks CEO of the Neighborhood Assistance Corp. of America, tells the New York Post. “[Previous settlements] have not provided significant benefits for the homeowners even though the homeowners were the most victimized very little was done to help the homeowners.” A couple of points: First, if $17 billion isn’t enough for these people, one has to wonder what number would be. Too many bank critics seem to be professional grievance mongers who’ve decided to not be satisfied with the banks no matter what the banks agree to. Bruce Marks in particular is a particularly disgusting example of this type; he’s made a career of whining about banks since the 1980s, when he used to regularly lambaste the old Fleet Financial for its mortgage lending practices. Being permanently unhappy is part of his business model. And second, defaulted homeowners were the ones “most victimized” by the subprime mortgage bubble and implosion? Please. It’s hard to see how defaulted borrowers were victims at all. These people freely and knowingly entered into contracts—mortgage loans—and then failed to hold up their end of the bargain. After they defaulted, many of them got to live in their properties rent-free for months on end. If anything, of all the groups affected by the subprime fiasco, defaulted borrowers might be seen as net winners. Among the biggest victims meanwhile you might consider employees of the banks like Countrywide and Bear Stearns, who lost their jobs as a result of the imprudent decision made by the people in charge. They didn’t do anything wrong, and their lives were turned upside down.

Regarding my piece Tuesday on Stanford economics professor Anat Admati’s plans for bank balance sheets, I hadn’t realized until I read in the New York Times on Sunday that the professor doesn’t have a background in banking, and only came learn about it in any detail as the financial panic unfolded. Fair enough. But my question is this: how can any tenured professor of economics, in any specialty, not have a basic understanding that banking involves leverage?

The Office of Minority and Women Inclusion at the Consumer Finance Protection Bureau “found that staff believed their supervisors micro-managed projects, were unclear about their priorities and lacked uniform standards for employee performance,” Reuters reports. “CFPB employees said they did not understand the bureau’s hiring, promotion and pay practices, which contributed to the impression those decisions were unfair, the report said.” This news is latest piece of evidence that the CFPB is apparently an ongoing managerial and bureaucratic disaster, and has been from the moment it opened its doors. Still, if this is how the agency treats its own employees, one has to wonder what kind of holy hell is in store for the entities it regulates.

Tom, just want to thank you for sharing your views on banking. Always helpful to me at least.

One question. I do not understand why US banking isn’t fighting back what almost amounts to legal black mailing by the Federal Government and borders abuse of power but the executive branch. Maybe I am just a stupid foreigner, but it blows my mind what for instance JPMs shareholders has had to suffer. First abuse by borrowers, then getting Bear stuffed down their throat in a weekend, and then the administration blackmailing the bank for misconduct by Bear prior to the merger. The US is a legal 3rd world country at times…

Nice column, Tom. All good point, except one. I agree that the borrowers who defaulted on their loans were not the ones victimized in the financial crisis. And you couldn’t be more on target with your description of Mr. Marks — whose non-profit organization originated some of the very loans he is now complaining about. However, I don’t think that the employees of Countrywide or Bear Stearns should be viewed as victims, either. Those companies also went into the deals they made with open eyes (and a thirst for profits). They are hardly victims.

The genuine victims of the crisis were those who played by the rules, did everything right, but then got swept away as the housing market collapsed. I am thinking of those people in Nevada, Arizona, Florida or California who put 20% or more down on their home purchase and who could afford their payments — and now find themselves living in homes where the mortgage exceeds the value of the home. To them one might add companies that were devastated and employees who lost their job as a result of the economic downturn. They are the true victims, as they did nothing wrong. Alas, they won’t receive a penny of any of these settlements.

I dont get that. Do you really think that people when buying a home with leverage and profiting hugely on home price increases are victims if home prices fall and they lose heavily because of their own decision to purchase and borrow? This point of view is so widespread in the US. I find it strange, and almost condescending to the intelligence of homebuyers viewing them as if they were clueless five year olds. They were hardly victims in my book. No more so than if they borrowed money to buy equities and ended up insolvent. I find it hard to see the difference.

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